Why is this man smiling?

In Wichita, the chair of the Wichita Metro Chamber of Commerce crafts a sweetheart deal for his company to the detriment of Wichita taxpayers.

In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This item was of more than usual interest as the company’s CEO, Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce.

At the same time the city council voted to rent to High Touch up to 180 parking stalls at monthly rent of $35. These are located in the garage at 215 S. Market. The condition of the garage had deteriorated so much that it had been closed. In March 2014 the city council decided to rehabilitate the garage. According to city documents, the cost to rehabilitate the garage is $9,685,000, which creates 550 parking stalls. This is a cost per stall of $17,609.

A question is this: Who was the biggest beneficiary of this transaction: High Touch and its owners, or city taxpayers?

To evaluate real estate investments, a common metric is capitalization rate. The formula is

capitalization rate = annual net operating income / cost (or value)

For a parking stall in this garage as rented to High Touch, the capitalization rate is

($35 per stall per month * 12 months per year) / $17,609 cost = 2.4 percent

How do we place this number in context? Is this a good or bad deal for taxpayers? To answer this question, we need to find an appropriate capitalization rate. In major cities the capitalization rate for parking garages is lower than for other types of real estate, perhaps five percent. Local sources say the rate in Wichita for parking garages could be seven or eight percent, but there are no recent parking lot transactions to help gauge what the market wants for a capitalization rate. Taxpayers may remember when the city evaluated the Union Station project in October, part of which is a parking garage, the city used a capitalization rate of nine percent. That’s the capitalization rate the city felt the investor deserved to earn, and the city used that rate to justify taxpayer subsidy.

But on the 215 S. Market garage the city, on behalf of taxpayers, accepted a cap rate of just 2.4 percent.

What if the city wanted to earn a capitalization rate of nine percent for taxpayers? The annual rent for each parking stall would have to be $1,585, or $132 per month. At seven percent capitalization rate, the monthly rent would be $103.

But the city is renting the spaces for just $35, not $132 or $103.

It’s actually a better deal for High Touch — and a correspondingly worse deal for city taxpayers — than these numbers show. If High Touch was to build a parking garage itself, it would encounter expenses such as insurance, lighting, cleaning and sweeping, repairs and maintenance, and security. Not to mention taxes, which the city does not pay. But the city will pay these other expenses, except for insurance, as the city self-insures. That has an implicit cost that taxpayers bear.

All of these costs are contained in the $35 monthly rent the city will collect from High Touch. It’s a great deal for High Touch, and a bad deal for city taxpayers. It also establishes a template whereby private sector developers are unlikely to develop parking in downtown Wichita when there is a competitor that can undercut their rates, using taxpayer dollars to do so.